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What Happened to Industry in New Jersey and How to Bring it Back

What Happened to Industry in New Jersey and How to Bring it Back

What Happened to Industry in New Jersey and How to Bring it Back

By Brett J. Haroldson

When Alexander Hamilton teamed up with Assistant Treasury Secretary, Tench Coxe, to advocate for the industrialization of America in 1791, the two men agreed that Paterson, New Jersey would be the ideal location to begin.[1] A pecuniary prophet nearly a hundred years ahead of his time, Hamilton never lived to see Paterson become the “Silk City,” a flourishing textile mecca just thirteen miles west of Manhattan. Fortunately for Hamilton though, neither would he see the day that Paterson became the seventh most dangerous small city in America, with 27.6% of its inhabitants living in poverty and a murder rate ten-times higher than Somalia.[2][3] Although the question begs to be asked: “what went wrong” perhaps the better question to ask is, “what can we do to bring industry back to New Jersey?”

Joe Piscopo, former Saturday Night Live alumnus and host of the popular morning radio news show, Piscopo in the Morning on AM970 The Answer, wants to see manufacturing return to New Jersey’s inner cities. “My plan—I call it the Piscopo Plan—is to take a product, let’s use Nike as an example, and you get an influential governor and a union leader to work together, you give the companies corporate tax breaks, and you make the sneakers in Camden,” Piscopo told us. “It’s not just about the people in the inner cities; it affects everyone. It lowers crime, it lowers taxes, and most importantly it fulfills our responsibility to help the most disenfranchised people in our state.” Piscopo continued.[4]

However, the problem with the Piscopo Plan is that the executives and directors of corporations like Nike have a fiduciary duty to their shareholders, not the people of America’s inner cities, according to former Senior Vice President of Campbell’s Soup Company, John Coleman. Coleman explains,
There are two corporate governance issues here: first, should a company, instead of picking a place outside Toledo or rural Texas or California, say,
“lets go to an urban enterprise zone?” Does the company have a responsibility to do that? And second, do the shareholders have a cause of action if the company does that and revenues drop?[5]

 

According to Coleman, who was one of Campbell’s top executives when the company shut down its last manufacturing plant in New Jersey due to excessive costs, corporate executives who deviate from the cost-minimizing made-in-China paradigm could face civil liability in a derivative action suit as a result. And that’s just the tip of the iceberg. Coleman rattled off a number of financial frustrations associated with doing business in inner cities, including scarcity of available space, added environmental barriers, energy issues, and especially difficulties in importing and exporting in such congested areas. “All the factors that made cities desirable places to manufacture a hundred years ago are now the same factors that make cities undesirable places to manufacture now,” Coleman explained.

Although Coleman’s panoply of reasons why corporate manufacturing should avoid cities like the plague is certainly justified in the context of corporate titans like Campbell’s, it is not necessarily anathema to the Piscopo Plan. An overwhelming majority of all corporations, including New Jersey corporations, are small, closely held local businesses. While Campbell’s may be able to save untold amounts of money by moving operations to California, (a main source of its predominant input—fresh tomatoes), a smaller corporation probably cannot afford to open a 600-acre manufacturing plant in California.

Furthermore, a company that manufactures locally may be able to spin that fact into a profitable P.R. selling point. For example, Piscopo pointed us to the success of Mike Lindell’s wildly successful product, “My Pillow,” which is manufactured entirely in the company’s home state of Minnesota. Between 2011 and 2012 alone, the number of employees at “My Pillow” ballooned from just 40 to a whopping 400![6] For “My Pillow” local manufacturing has been a successful marketing tool for the product. Perhaps New Jersey corporate directors could justify decisions to manufacture goods in New Jersey for similar P.R. reasons and enjoy protection from civil liability under the business judgment rule if profits go south.

It is certainly worth noting that many New Jersey companies do, in fact, manufacture here. DuPont Chambers Works, Anheuser-Busch, and Johnson & Johnson are but a few examples. Additionally, Flying Fish Brewing Company is located just ten miles outside of Camden and is a popular favorite among craft beer enthusiasts. Flying Fish founder, Gene Muller, told us that some of the greatest benefits of manufacturing in New Jersey are the high population density and the location. Interestingly, these same factors often work against larger companies, like Campbell’s, which supplies much larger geographic areas and need more space and less congestion. Yet, it makes sense that a smaller company, like Flying Fish, would benefit from being proximate to densely populated consumer pockets where good, locally made products are in demand.

The cons of manufacturing in New Jersey? In addition to “the usual stuff,” like high taxes, Muller cites the State’s lack of support for businesses like Flying Fish. “When I was starting my business,” Muller recounted, “I called Trenton and asked if they had a packet of information for folks starting a new business in the state. The clerk said, ‘like all the forms, fees, and other information you need?’ I said, ‘that’s perfect!’ To which she replied, ‘nah we don’t do that.’”[7] An increase in state support for local business is something that can really make a difference, and it is something New Jersey might need to work on.

Consider Brooklyn, New York for example. Although manufacturing jobs have continued to decline in New York’s most populous borough, they have been declining at a much slower rate in recent years.[8] According to one article, the retarded decline in Big Apple manufacturing represents the success of city-sponsored programs aimed at helping both new manufacturers, as well as seasoned ones.[9] One such program is the New York City Economic Development Corporation (“NYCEDC”), the City’s “primary engine for economic development, charged with leveraging the City’s assets to drive growth, create jobs, and improve quality of life.”[10] In 2009, for example, the NYCEDC was able to beat out New Jersey in a battle over the location of a Pepsi manufacturing facility. Despite lower long-term costs in New Jersey, the NYCEDC used a variety of shrewd tax exemptions to entice Pepsi to stay in New York.[11] New Jersey’s answer to the NYCEDC is called The Partnership for Action. Created by Governor Chris Christie, the Partnership for Action is comprised of several non-profit companies and State entities that work together to promote economic development in the Garden State. Of course it is unclear how effective the Partnership for Action actually is, or can be, given the persistent existence of more pernicious problems like crime and inadequate education in New Jersey’s cities.

One State entity comprising the Partnership for Action is the Office of the Secretary of Higher Education. Thus the State of New Jersey certainly seems to recognize the importance of education in the eyes of businesses. Both Piscopo and Coleman spoke a great deal about the importance of education as well. “When you walk into a factory, two things strike you immediately,” Coleman explained, “first, how few people there are, and second, how high-tech everything is. Everyone is on a computer.” Because of the technologically advanced nature of modern factories, you need educated people to come in and operate them. This reality is not lost on Piscopo, who includes an education component in his Piscopo Plan. “The State has to start opening STEM [science, technology, engineering, and mathematics] schools in the inner cities to teach these kids how to use the necessary technology and computers,” Piscopo insists. However Coleman, who has also served on the board of directors for various non-profits that pay to send promising inner-city youths to suburban private schools to get better education, counters that the education itself is not always the problem. “We try and send these kids to the best schools in the country, but at the end of the day our buses are dropping these kids back off in a pile of crap,” Coleman notes with his trademark candor. According to Coleman, the problem, especially with young men, is that when their environment at home is really bad it often has a tendency to negate the beneficial effects of a solid education.

A lack of institutions of higher education in New Jersey may also drive corporations out of state. Nowhere is this more evident than in the pharmaceutical industry. Once known as America’s medicine chest, New Jersey boasted one of the largest pharmaceutical markets in the world. Today, many of these drug companies have left for places like Massachusetts. According to Erik Gordon, business professor at the University of Michigan, pharmaceutical companies don’t want to shoulder the burden of developing and innovating genomics and biotechnology—they would prefer to work near educational institutions where research faculty are doing that, presumably on someone else’s dime. [12] New Jersey doesn’t really have that.

What we need to focus on is what we do have, and what we could have. Many of New Jersey’s cities already have great locations just a stone’s throw away from New York City and Philadelphia; however, New Jersey’s cities have lower rents than their cosmopolitan neighbors. When those lower rents are coupled with their proximity to two of America’s largest cities, there is definitely potential to attract talented and ambitious millennials who are struggling to find work and who are turned off by the prospect of slaving away for large, public corporations. After all, New Jersey has the third highest number of patent-holders per capita of any state, which means our greatest natural resource is arguably inventive fecundity.[13] Why not parlay that entrepreneurism into a booming, sustainable economy of small, local manufacturing operations? Although organizational entities like the Partnership for Action can certainly help in this area, there needs to be more assistance from the state legislature itself. The most obvious form of State-sponsored assistance is, of course, tax incentives.

With a corporate income tax rate of 9% in 2014, New Jersey tied with Rhode Island and Connecticut for the 6th highest corporate tax rate in the country.[14] No matter what the Partnership for Action may or may not be doing to help attract business to New Jersey, this 9% tax rate is what corporations are going to look at first. If this figure were reduced appreciably, New Jersey could make itself a much more desirable place to do business—especially given its prime location in the heart of the Megalopolis. Additional tax incentives could focus on promoting small to medium scale manufacturing in New Jersey cities. For example, perhaps corporations that manufacture in New Jersey cities get energy subsidies from the State, and/or lower tax rates. Perhaps goods manufactured in New Jersey should be sold tax-free to consumers to help offset the higher costs (including an abolition of the state sin tax on locally made beer, wine, and spirits). Maybe the owners and employees of corporations that manufacture in New Jersey cities receive discounts on their personal income taxes as well. Perhaps individuals who purchase a certain amount of goods from such companies could also file for personal tax breaks (much like a charitable deduction). There are a number of creative tax incentives the State could employ to promote a relatively quick proliferation of small to medium size businesses in New Jersey.[15]

Additionally, long-term goals should probably include improving education in New Jersey’s inner cities—with a special focus on STEM training. Although perhaps an overly lofty aspiration, the State might even try to create a new biotechnology and genomics school in Newark or Camden that could eventually help draw pharmaceutical companies back to New Jersey—or at least try and increase funding to any such schools already in existence. Of course educational shortcomings are notoriously intractable, especially when coupled with rampant crime and poverty, but there should at least be an attempt to ameliorate some of the more curable defects (like focusing on STEM based educational curricula in secondary schools).

These issues have been debated for centuries, and the pool of ideas as to how to solve these problems is as rich and diverse as the people of New Jersey’s cities themselves. This post is by no means an attempt to solve all of the economic problems of New Jersey’s inner cities, but rather an attempt to start a dialogue about how to do so. After all, action is almost always prefaced by discussion. Regardless of whether or not something like the Piscopo Plan will ever work, it is the beginning of a conversation—a conversation that we desperately need to have. I don’t pretend to have all the answers, but maybe someone reading this does. And if we all put our heads together and start talking about this then perhaps, with time, Hamilton’s vision of booming industry in New Jersey’s cities will once again become a reality.

[1] Ron Chernow, Alexander Hamilton 373 (2004).

[2] Ryan Gorman, Detroit named America’s Most Dangerous City for Second Year in a Row, America Online, Nov. 14, 2014, http://www.aol.com/article/2014/11/14/detroit-named-americas-most-dangerous-city-for-second-year-irvine-safest/20993853/.

[3] Intentional Homicide, Number and Rate per 100,000 Population, U.N. Data, http://data.un.org/Data.aspx?d=UNODC&f=tableCode%3A1 (last visited Oct. 2, 2015).

[4] Telephone Interview with Joe Piscopo, Host of Piscopo in the Morning, AM970 The Answer (Sept. 19, 2015).

[5] Telephone Interview with John Coleman, Chief Operating Officer, NCI Consulting (Sept. 19, 2015).

[6] John Vomhof, Jr., My Pillow Soars After Infomercial, Minneapolis/St. Paul Business Journal, June 22, 2012, http://www.bizjournals.com/twincities/print-edition/2012/06/22/my-pillow-soars-after-infomercial.html.

[7] E-mail from Gene Muller, Founder, Flying Fish Brewing Co., to Brett J. Haroldson, Candidate for JD, Rutgers Law School (Sept. 22, 2015, 17:36 EDT) (on file with author).

[8] Joseph Berger, Instead of Industrial Giants, Brooklyn has Niche Factories, The New York Times, Aug. 7, 2012, http://www.nytimes.com/2012/08/08/nyregion/small-factories-thrive-in-brooklyn-replacing-industrial-giants.html?hpw&_r=1.

[9] Thornton McEnery, NYC Manufacturing No Longer Bleeding Jobs, Crain’s New York Business, March 26, 2014, http://www.crainsnewyork.com/article/20140326/ECONOMY/140329904/nyc-manufacturing-no-longer-bleeding-jobs.

[10] NYCEDC, http://www.nycedc.com/about-nycedc (last visited Sept. 22, 2015).

[11] NYCEDC, http://www.nycedc.com/project/pepsi-cola-bottling-company-new-york (last visited Sept. 22, 2015).

[12] Dan Tucker, As Pharma Jobs Leave N.J., Office Space Ghost Towns Remain, N.P.R., July 30, 2014, http://www.npr.org/2014/07/30/336337115/as-pharma-jobs-leave-n-j-office-space-ghost-towns-remain.

[13] Government Statistics: Patents Issued (per Capita) (Most Recent) by State, StateMaster,http://www.statemaster.com/graph/gov_pat_iss_percap-government-patents-issued-per-capita (last visited Oct. 2, 2015).

[14] Scott Drenkard & Richard Borean, Top State Corporate Income Tax Rates in 2014, Tax Foundation, April 30, 2014, http://taxfoundation.org/blog/top-state-corporate-income-tax-rates-2014.

[15] Arguably, certain incentives that have the purpose or effect of discriminating against out of state businesses might be struck down as unconstitutional under the Dormant Commerce Clause. The gist of the Dormant Commerce Clause is that no state can pass a law that has the purpose or effect of commercially favoring one state to the detriment of other states. See, e.g., Dean Milk Co. v. Madison, 340 U.S. 349 (1951). However, tax incentives have long been used as a means of attracting businesses to states, (as evidenced by the NYCEDC’s Pepsi deal mentioned above), so the applicability of the Dormant Commerce Clause here is dubious; however, it is something to be mindful of when drafting any legislation intended to exclusively favor New Jersey businesses.